Continuing where I left off here, let’s
now consider why JG reduces unemployment. Incidentally, if you find the
arguments and ideas below hard going, don’t worry: as far as I know there is no
economist on planet Earth who has any sort of grasp of these ideas. Though a
possible exception is Malcolm Sawyer.
As mentioned in Part I, there is crude
but nevertheless theoretically interesting way of abolishing unemployment. It’s
to tell the unemployed their unemployment benefit is conditional on their
walking up and down their street keeping it free of litter. And those refusing
that work are deemed to have turned down a job, and are thus not counted as
unemployed: so unemployment vanishes.
With a view to making that unemployment
abolishing system more efficient, let’s first consider whether the subsidised
jobs (JG) should be on what might be called “specially set up” schemes or
employers like the Work Project Administration in the US in the 1930s or the
“Job Creation Scheme” set up in the UK in the 1970s. The Alaternative is to
allocate JG people to EXISTING employers.
Existing versus specially set up
employers.
The reason specially set up employers
don’t make much sense is quite simple, and is as follows.
The productivity of the above
hypothetical street cleaners could obviously be improved by giving them a
bigger variety of jobs and having them work with more materials, capital
equipment and permanent skilled supervisory labour (which I’ll refer to as
“other factors of production” (OFP). But there is a problem there, as follows.
As demand is raised, inflation kicks in
in a serious way. The point at which it kicks in is given various names. I’ll
use a popular one: NAIRU.
Now there is not much point in JG when
unemployment is above NAIRU since employment can be raised simply by raising
demand. I.e. JG really comes into its own at NAIRU.
But at NAIRU, a JG system cannot just
order up oodles of OFP for JG people to work with: that OFP can only come from
the existing or regular economy, the latter is (by assumption at capacity, or
NAIRU).
So do we set up a JG scheme consisting
of specially set up employers which employs virtually no OFP? Because if so,
output would be ridiculously low. Plus one would then have two sets of
employers, performing very similar tasks in some cases, with one set being efficient
and the other being ridiculously INEFFICIENT.
Much better is to let EXISTING EMPLOYERS
take on JG people. That way, those JG people are working alongside relatively
normal levels of OFP, thus their output will be reasonable.
Why does “street cleaning” reduce
unemployment?
It might seem that the above crude
street cleaning solution to unemployment works because the relevant output
(street cleaning) is given away rather than sold: i.e. no additional demand is
required to bring the jobs into being. And demand is the big constraint on
raising employment: it can cause excess inflation.
But, as pointed out in Part I, we’ve had
an ASTRONOMIC INCREASE in the proportion of GDP “given away” over the last 150
years (i.e. a big increase in the public sector) and unemployment has not
fallen in consequence. So the “give away” point is clearly defective.
Now the defect lies in that word
“inflation”: excess inflation does not occur simply because demand rises.
Inflation occurs when aggregate demand is excessive RELATIVE TO aggregate
supply, labour supply in particular. And if the above crude “litter clearing”
solution to unemployment were implemented, the reason it works would SEEM TO BE,
first that the output is given away, so no extra demand is needed. Second,
there is no reduction in labour supply to the regular jobs market. That is,
those engaged in litter clearing have just as much incentive to seek regular
jobs as when unemployed. Indeed, they arguably have MORE INCENTIVE.
But there’s actually yet another
condition that has to be fulfilled for the system to work, and as follows.
Extra output must come JUST FROM JG
people.
The cost of JG employees to the employer
needs to be such that ALL EXTRA OUTPUT stemming from the JG system comes from
employers hiring JG people rather than from their hiring more JG people plus
more OFP. Remember: employing more OFP is not allowed.
So the price of JG labour has to be such
that employers are induced to expand output PURELY BY taking on JG people. So,
just to keep it simple, JG people really need to be allocated to employers for
free.
But note that if the latter objective is
attained (having extra output come from JUST JG people rather than JG people
plus more OFP), that makes allocating JG people to PRIVATE SECTOR employers
just as inflation free as allocating them to PUBLIC SECTOR employers. That is,
if demand is raised, and private sector employers are induced NOT TO raise
their demand for OFP, but to bring about an increase in production PURELY BY
hiring JG people, then no extra inflation will ensue.
Put another way, the basic cause of
excess inflation is excess demand for OFP BOTH FROM public and private sectors.
But if that excess demand can be avoided (in either sector), then there is no
reason not to extend JG to the private sector, as indeed has been done in the
case of the UK’s Work Programme and other similar schemes in Europe over recent
decades.
To summarise, the idea that JG works
because it concentrates on “give away” activities is actually nonsense. The
reason it works is rather that (if properly structured) it induces employers to
get extra output JUST FROM JG people – not from permanent skilled people, and
second, JG people have the same incentive to seek regular work as when
unemployed.
Further arguments for private sector
JG.
1. The private sector is better at
employing relatively unskilled labour than the public sector, i.e. average
skill levels are higher in the public sector.
2. In that the purpose of JG is to
maintain skills, the bigger the VARIETY of employers and jobs to which to
allocate JG labour the better.
3. The empirical evidence is that post
subsidised employment record of those who have done subsidised private sector
jobs is better than those who have done subsidised public sector jobs.
One problem that I see is this system creates an incentive for employers to hire JG workers instead of workers they would normally have paid to hire. Maybe this a minor problem but we had a system like this in the 80s in Canada. The program was called Job Sharing and employers could hire the JS people at a fraction of regular wages. The hours of regular employees were reduced to facilitate the JS hiring. The program did give people much needed work experience.
ReplyDeleteHi John,
DeleteVery good point. I should have said something about that. I've got an answer for that which is basically that if JG people stay with a given employer for a relatively short period, employers won't use them to displace permanent / key staff with firm specific skills. But I need to say more about that. So Part III will appear in a few days. Thanks for your interest.